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12.11 Debt — income statement classification
Publication date: 31 May 2022
us Financial statement presentation guide
This section discusses considerations for certain items that may affect income statement classification. They include:
- Debt extinguishment gains and losses (see FSP 12.11.1)
- Modification or exchanges (see FSP 12.11.2)
- Participating mortgage loans (see FSP 12.11.3)
- Debt with a conversion feature (see FSP 12.11.4 (after adoption of ASU 2020-06) or FSP 12.11.4A (before adoption of ASU 2020-06))
- Related party debt restructurings (see FSP 12.11.5)
12.11.1 Debt extinguishment gains and losses
Gains and losses from extinguishment of debt include the write-off of unamortized debt issuance costs, debt discount, and/or premium.
ASC 470-50-40-2 requires an extinguishment gain or loss to be identified as a separate item. However, given that neither the ASC guidance nor Regulation S-X specifies where in the income statement the gains and losses should be presented, we believe there is more than one acceptable approach. The selected approach should be consistently applied to classifying an extinguishment gain or loss. Some approaches include:
- Classifying the amount as a separate line item on the income statement
- Classifying the extinguishment gain or loss in interest expense with disclosure of the components of the gain or loss in the footnotes
12.11.2 Income statement classification — revolving debt modifications
As discussed in ASC 470-50-40-21, a charge to income may result from a modification or exchange of a revolving debt agreement due to unamortized deferred costs being written off when the borrowing capacity of the new arrangement is less than the borrowing capacity of the old arrangement. This charge to earnings should be treated in a manner similar to gains and losses on extinguishments (discussed in FSP 12.11.1).
12.11.3 Participating mortgage loans
Under a participating mortgage loan arrangement, the lender (mortgagee) is entitled to share in the rental or resale proceeds from a property owned by the borrower (mortgagor). Any periodic amortization of debt discount relating to a participating liability is reported in interest expense. As discussed in ASC 470-30-40-1, any gain or loss resulting from the difference between the recorded amount of the debt (including the unamortized debt discount and the participation liability) and the amount exchanged to extinguish the debt before its due date is recognized in income in the period of extinguishment and treated as a debt extinguishment gain or loss (discussed in FSP 12.11.1).
12.11.4 Expense classification – debt with conversion feature—after adoption of ASU 2020-06
When a convertible debt instrument is converted to equity securities of the borrower pursuant to an inducement offer (expense recognized under ASC 470-20-40-16), the inducement charge should be treated in a manner similar to gains and losses on extinguishments (discussed in FSP 12.11.1).
12.11.4A Expense classification - debt with conversion feature — before adoption of ASU 2020-06
For debt with a conversion feature, the following expenses should be treated in a manner similar to gains and losses on extinguishments (discussed in FSP 12.11.1):
- The unamortized discount remaining at the date of conversion for instruments with beneficial conversion features (expense recognized under ASC 470-20-40-1)
- The inducement charge when a convertible debt instrument is converted to equity securities of the borrower pursuant to an inducement offer (expense recognized under ASC 470-20-40-16)
12.11.5 Restructuring debt with related parties
If a borrower restructures its debt with a debt holder that is also an equity holder, the counterparty may be considered a related party. In that case, it may not be appropriate to recognize any associated gain or loss in the income statement under ASC 470-50-40-2. Instead, such a restructuring may be essentially a capital transaction, and the gain or loss may be required to be classified in equity. See FG 3.3.5 for details on the accounting for this type of transaction.
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